What’s next for the FED?

During the last Federal open market committee meeting, the committee highlighted that they are on the verge of raising interest rate for the first time in almost a decade but provided that economic data over the next couple of weeks continue to meet expectation. It will be recalled also that the Federal reserve chairman, Janet Yellen during are testimony before the congress also mentioned the fact that raising rate in December is still on the table provided all economic data continue to fall in line with expectation and she was a bit optimistic by saying the US economic is growing moderately and they expect to see further improvement before the end of the year.

This is clearly an indication that the Federal open market committee are data dependent and if market continues to see strong economic data coming out as expected or better than expected, then we might see a hike in December. To keep the December hopes alive, the Nonfarm pay roll data on Friday which measure the strength of the labour market in the US economy in terms of number of jobs created every month was printed at 271,000 jobs beating market expectation of 180,000 jobs. This means, the US economy added more jobs than expected and it is the strongest figure so far in 2015. Market got really excited with this figure as USD rallied across the board and commodity prices further dipped to the downside. Other economic news also indicated the US labour market is now really strong: unemployment dropped to 5.0% from 5.1% which is full employment, average hourly earnings also increased to 0.4% but labour participation remains the same at 62.4%. With all these strong economic data, without any doubt the Federal Reserve has to raise the rates in the next committee meeting.

However, inflation rate might be a factor that might hinder the Federal Reserve from raising interest rate in the next Federal open market committee meeting in December. Inflation target by the Federal Reserve is pegged at 2% but at the moment, inflation rate is at 0%. Also, raising the interest rate at this time might have more damaging effect on emerging market most especially at a time when china’s economy is on a slowdown. US Dollar strength might lead to financial instability in the emerging market; this is similar to 1992-2001 when we saw a USD bull market cycle.

In conclusion, I think December is the time for Federal Reserve to raise the rates, going by their proposition of data dependent. Good economic data from November to December will further support raising hike in the next meeting.